Japanese Internet company Rakuten, a 10,000-person e-commerce giant with a $20 billion market capitalization, announced last week it will buy Viber for $900 million, in a deal that would add 300 million users to Rakuten's user base. Viber is a call and messaging app company run from Cyprus by Israeli entrepreneur Talmon Marco.Viber, which obtains most of its revenue from selling stickers and emoticons to users, has never made money, logging a net loss of $29.5 million on revenue of $1.5 million for the year ended in December.
The deal gives Rakuten exposure to the fierce market of instant messaging and freemium voice-over-IP services, where Microsoft's (NASDAQ:MSFT) Skype, Facebook's Messenger, and Tencent Holdings' (NASDAQOTH:TCEHY) WeChat are the main players. With most competitors offering free messaging and calls, monetization in this market is known to be extremely hard. Given this difficult context, why did Rakuten buy Viber?
Analyzing the deal
Although Rakuten started its business as an e-commerce shop, the company quickly built a rich portfolio of media services, as it bought a Canadian e-reader company in Kobo, UK website Play.com, American website Buy.com, a baseball team in Japan, and expanded into financial services. As a result, despite obtaining the core of its revenue from its e-commerce business in Japan, Rakuten managed to establish a global network of 200 million users, the first step in its globalization process.
Viber, which has users in 193 countries, will bring 300 million additional users to Rakuten's network. In exchange, Rakuten will be paying almost $3 per user, which may sound high if we consider that Viber generated $1.5 million in total revenue last year.
With 500 million users in 193 countries, Rakuten is now more than ready to take the next step in its plans to "become the world's No. 1 Internet services company", which involves generating meaningful cash flow from its overseas business.
The war for messaging
The Viber acquisition provides Rakuten with direct exposure to the fierce market of instant messaging and freemium voice-over-IP services. Messaging apps have become very important platforms in Asia at the consumer level, as evidenced by the recent success of Tencent's WeChat, which according to GlobalWebIndex is the fifth most-used smartphone app worldwide. In 2013, WeChat claimed it had 100 million registered users and more than 300 million registered Chinese users.
Even at the enterprise level, the relevance of instant messaging apps cannot be ignored. By 2010, as much as 37% of Skype calls were business-related. This motivated Microsoft to roll out corporate subscription packages suitable for conference rooms. Now Skype has a huge portfolio of enterprise communication services, which includes Skype Manager -- a web-based control panel that allows managers to allocate Skype credit to employees -- and Skype Connect, which allows users to receive calls on their office phones.
In Japan, it seems Rakuten's most important rival will be Line, a messaging app with more than 350 million users that grossed $318 million in revenue in 2013, due to its revenue-generating gaming platform and its in-app purchases.
Final Foolish takeaway
By acquiring fast-growing Viber for $900 million, Rakuten will be paying almost $3 per user. However, there is a huge potential for monetization. Rakuten could start selling its e-commerce, online finance, and digital content to Viber users, generating attractive cash flow. Finally, the acquisition of Viber is a crucial step in Rakuten's globalization efforts.
Adrian Campos has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.